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Despite depressed demand for condos, Eric Midby, on the roof of the Escala building, aims to start another large condo project in anticipation of an upturn.

Jeanne Lang Jones

Staff Writer

(Page 2 of 4)

Call him a contrarian. Escala developer Eric Midby expects to move ahead with a pair of high-rise hotel and condominium towers at a time when nearly every other developer has decided to sit out this market because of the recession.

Midby, a principal and development manager at Lexas Cos., is betting that by getting the company’s next condo project under way now, he can exploit a two-year gap in the delivery of new condominium units in downtown Seattle that starts next year.

“We firmly believe that Seattle very soon is going to have a shortage of housing, that all the units in downtown will fill up and there will be continued demand,” Midby said.

Right now, however, Midby’s plan is to add 370 condominiums to a housing market that is teeming with supply and promises very little demand.

According to Realogics, a Seattle real estate consulting, marketing and brokerage firm, more than 2,100 new condominium units will have come on the market in downtown Seattle between 2007 and the end of this year. Nearly one-third of the nearly 454 units that were completed in 2008 remain unsold, while half of the 776 units hitting the market this year are still available.

Lexas itself will add 268 luxury condos to the Seattle marketplace when Escala opens in downtown Seattle this fall. It will be competing for buyers with the recently opened Fifteen Twenty-One Second Avenue, Olive 8 and Enso projects.

Still, Midby is optimistic, despite the difficulties the continuing credit crunch presents for companies seeking financing for new projects.

“We think that the conditions developers are faced with right now are temporary,” Midby said.

And he wants to be ready when the market turns around. The Lexas Cos. has taken the first steps to develop a hotel/condominium project called 1200 Stewart on property at Stewart Street and Denny Way.

That first step includes early design and applying for a master-use permit with the city of Seattle.

If Lexas gets its master-use permit for the site later this year and proceeds with the remainder of the permits as Midby expects, he said it is conceivable the company could break ground on the project next year.

Still, there are several hurdles to overcome, not the least of which is finding financial partners in a tight credit market that will help pay construction costs.

“Financing in its current form is very difficult,” said Joseph Strobele, Lexas Cos. president. “We are in a very aggressive capital-raising campaign and have expanded our search to international sources as well.”

Strobele said the company does not have its construction financing lined up yet and likely won’t be able to obtain financing until 2010 at the earliest, which would push delivery of the project into 2013.

That would still make 1200 Stewart the only project announcing plans to move forward within the next two years, according to a project pipeline assembled by Realogics.

“It’s a contrarian approach but a proven investment philosophy. Demand can rise quicker than new construction,” said Realogics CEO Dean Jones, whose firm is handling the marketing for Escala.

“It’s sort of like baseball,” Jones said. “You want to hit it where they’re not. If there is no new construction inventory available until several years from now, that might be a good place to be. The question is, is there financing?”

For projects to move forward, three things need to happen, Jones said: Consumer confidence needs to be restored, permanent financing needs to be available at an attractive price and construction costs need to drop.

If market conditions improve, there are other developers that could move ahead quickly on their downtown Seattle projects. Those include Starwood’s stalled Hotel 1 hotel/condominium project next to Macy’s garage, and the 39-story Ava on the northeast corner of Eighth Avenue and Pine Street, which was sidelined last summer by the Fana Group of Companies in Bellevue and Vancouver, British Columbia-based Executive Development Group.

Meanwhile, William Justen Co., of Seattle, and Bellevue-based Columbia West Properties already have their master use permits for two 40-story towers on the northwest and southwest corners of the intersection of Second Avenue and Virginia Street in Seattle. The projects will be built one at a time once the developers feel confident about the residential market, William Justen said.

“I don’t know when that will be,” Justen said. “We did start Fifteen Twenty-One Second Avenue early in the last cycle and we were the first to complete a tall and slender tower, so we may be an early starter again, but I don’t know that for sure.”

The acid test will be: who is willing to move past the initial approval of the master use permit to the far more expensive permitting process that requires architects and engineers to lay out the building design and structure.

1200 Stewart

The proposed mixed-use hotel/condominium project would be located on a 50,000-square-foot site at Stewart Street and Denny Way. Plans call for two 35-story towers that would include:

Industries:

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